COLA rates falling faster than the yen in Japan


COLA rates falling faster than the yen in Japan

by: Erik Slavin and Chiyomi Sumida | .
Stars and Stripes | .
published: February 04, 2015

YOKOSUKA NAVAL BASE, Japan — Servicemembers in Japan have seen their paychecks shrink markedly in recent months as drops in cost of living allowances have far outpaced the purchasing power gained from a weaker Japanese yen.

On Sept. 1, one U.S. dollar bought 104.4 Japanese yen at intraday trading rates. By Jan. 9, the dollar bought 120 yen, an almost 15 percent increase in purchasing power.

During that same time period, an E-5 stationed at Yokota Air Base with eight years of service and two dependents living off base saw their daily COLA drop from $21.60 to $7.27 — or a monthly rate of $324 to $109 — a 66 percent decrease.

Servicemembers at most other locations in Japan saw a 30 percent to 50 percent COLA decrease, with the exception of sailors at Sasebo Naval Base, who saw a 19 percent drop.

COLAs could rebound slightly but may see an even steeper drop later this year, if forecasts from several Japanese economists of a weaker yen prove correct.

COLA is intended to give servicemembers the same purchasing power overseas that they would have if they lived in the continental United States.

There are three main factors that change COLA: comparative prices, currency rate and spending habits.

If Japanese prices had suddenly dropped in comparison with the U.S., the resulting added purchasing power would mean a lower COLA — but that didn’t happen, at least on a national scale.

Consumer prices in Japan rose at their fastest pace in 23 years at one point in 2014, shortly after a 3-percent hike in the nation’s sales tax. Inflation has remained between 2 percent and 3 percent for the first time in decades.

At the same time, consumer prices in the United States rose only 1.3 percent from December 2013 through November 2014, according to the Bureau of Labor Statistics.

Despite those figures, a retail price survey conducted by the military in April showed prices in Japan dropping in comparison to the United States, Pentagon officials said. Stars and Stripes has requested the survey data, but it was not immediately available.

“The recent COLA decreases for Japan are the result of both currency and data changes,” Pentagon spokesman Lt. Cmdr. Nate Christensen wrote in a statement. “Some locations experienced a decrease as the result of the annual data review coupled with currency changes, while other locations are experiencing decreases based solely on the drastic changes to the yen over the last six months.”

Data from a living pattern survey of servicemembers conducted in 2013 — when the yen was far stronger — also contributed to the recent COLA decreases, Christensen said.

Most COLA drops began in October, the beginning of the fiscal year. Japan is expected to report living expenses again in April 2015.

Currency value fluctuations do account for COLA rises and drops, but not entirely. For example, if surveys show that servicemembers in an area spend 50 percent of their spendable income off-base, and the local currency weakens against the dollar by 4 percent, then COLA would drop 2 percent, according to the Defense Travel Management Office website.

The days of 100-to-1 parity between the yen and dollar are unlikely to come back anytime soon, according to most economists. While predictions are far from a guarantee when it comes to world economies, Japanese and U.S. government policies are likely to keep the yen relatively weak.

Kengo Suzuki, chief foreign exchange strategist at the Mizuho Securities, forecasts the yen will strengthen over the next few months into the 115 range before falling further.

In June, the U.S. Federal Reserve is expected to raise interest rates, while the Japanese will continue their weak yen policies as an economic stimulant, Suzuki said.

Suzuki expects those factors, along with a positive U.S. economic outlook, to sink the yen into the high 120s, and possibly the 130s, against the dollar.

Yuji Kameoka, chief foreign exchange analyst at Daiwa Securities, said the yen has only remained as strong as it is because of the global decline in oil prices.

“However, the drop in oil prices will not last long and the world economy will recover, making the yen … a weaker currency,” Kameoka said.

The Japanese government will pursue a weaker yen in order to sell more Japanese exports overseas, he said. Meanwhile, if the U.S. stock market continues its gains, demand for yen will drop, further weakening the currency.
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